The high level of public debt has magnified these challenges, the Fund said, in the statement after concluding its Article IV consultation with Italy.

IMF noted that Italian economy is struggling to emerge from a balance sheet recession.

Against the background of significant economic slack, inflation fell well below 1% and unemployment reached 12.3%. Sovereign spreads narrowed but financing conditions remain very tight for the corporate sector and non-performing loans continue to increase.

Optimism

Italy's GDP growth is expected to pick up to 1.1% in 2015 as credit conditions normalise and the effects of the easing measures by the European Central Bank are felt, even though risks are still tilted to the downside.

Prime Minister Renzi has outlined a bold reform agenda: firm implementation is now essential to create jobs, increase productivity, and lift potential growth from a low estimate of about 1⁄2%, IMF said.

IMF expects Italy's nominal budget deficit to be around 3% of GDP this year. In structural terms, a deficit of 0.8% of GDP is expected. Public debt will peak this year at about 136% of GDP may decline thereafter.